I sometimes see scholars, government officials, and even long-term care insurance agents suggesting that long-term care insurance (LTCI) is suitable only for the middle class, and not for rich people.
The idea is that rich people can self insure themselves against the risk of needing long-term care (LTC)
The folly of that view hit me recently when I was talking to someone who is facing LTC costs without LTCI.
I'll change the details here to protect "Margaret's" privacy, but I think her story illustrates why depending solely on wealth to cover LTC costs is a bad idea.
Margaret comes from an affluent family in New Jersey, where her father, George, was a well-known, well-compensated business professor who accumulated a fine collection of classical statuary. He also set up an annuity with TIAA-CREF. He died several years ago.
Now, Margaret's mother, Charlotte, is suffering from dementia and cannot help with her affairs. The TIAA-CREF annuity is helping to pay for private nurses as well as for Charlotte's other living expenses.
Some of the challenges:
- Before George passed away, there was no way for Margaret, let alone an LTCI agent talking to Margaret about the idea of buying LTCI for parents, to know quite how wealthy George was. Margaret dresses in simple clothes, lives an unassuming life, and thinks of getting a hotdog from a hotdog joint as a night on the town. An LTCI agent who trawled society galas looking for heirs would never have run into Margaret, unless, maybe, Margaret was working on the catering crew. And Margaret herself had only a vague idea of what her father was worth. Given that much of George's wealth was tied up in statues, it's not clear that he knew how much he was really worth.
- Wealthy people don't necessarily have much liquid cash. Charlotte has a lovely house, lovely furniture, a great income annuity, a fine collection of sculpture, and Margaret, but not all that much money in the bank. If the cost of her care increases dramatically, Margaret will have to figure out how to sell one of her father's sculptures. Selling a museum-quality sculpture is a long, complicated, unpredictable process. No home health care agency will take 10% of the value of an old statue as payment. Home care agencies and other LTC providers like to be paid with cash. LTCI policies pay either the insureds or the providers with cash.
- The value of assets fluctuates, and, in some cases, assets simply disappear. George invested his money in TIAA-CREF and statues, but he has friends who turned their money over to Bernie Madoff. No matter what kinds of problems the LTCI might be having, I'm more confident about U.S. life insurers backing up their guarantees than I am about mutual funds hitting performance targets, or about money managers staying out of federal penitentiaries.
- The children of wealthy people don't know any more about shopping for LTC services than the children of anyone else knows. The best LTCI providers provide at least some advice about how to find and use LTC services. Margaret has had to muddle along on her own.
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